Apple Has a List of 100 Potential Store Sites
--But finding an open space in the best malls is difficult
Happily, Apple's retail stores will generate $1.2 billion in revenues during the fiscal 2004, and will post its first full year of profitable operation, according to Sr. vice-president for Retail Ron Johnson, speaking at a design conference in Providence (RI). Johnson also revealed that Apple's stores were the fastest retail operation to ever reach $1 billion in annual revenues, taking just three years to reach the mark, beating out the previous record-holder, clothing retailer The Gap.
Johnson gave the luncheon keynote to a crowd of 500 persons at the annual Success by Design Conference, and also accepted an Award of Excellence from the group on behalf of Apple for its products and stores. During his one-hour talk and question-and-answer session, Johnson explained the science and philosophy of Apple's retail operation, filled in some history of their creation, and gave a preview of future stores.
Much of Johnson's speech covered material that he's previously discussed, but he did reveal some new tidbits of information, including that the Regent Street (London) store opening in Oct.-Nov. 2004 will be 75-feet wide on two floors, and that Apple tracks retail store revenues at four-minute intervals. He also claimed that Apple's authorized resellers actually do better in regions where there are Apple stores, not worse.
Roaming the stage without a sport coat, Johnson explained his previous work at Target and recalled the history of retail stores in general. He said that most stores during the 1970s and 1980s sold brands manufactured by others. In the 1990s, The Gap changed all that by creating its own brands and selling them through its own stores. Target picked up on that concept while Johnson worked for the company.
He recalled seeing the household design creations of Michael Graves, specifically a $175 teapot that was elegant--but expensive. During a luncheon meeting, Johnson asked Graves if he would design a teapot specifically for Target, and Graves jumped at the chance to "democratize" design, and bring something elegant to "ordinary" people. Thus was born the Target-branded merchandise line, which combined low prices and good design.
Johnson then moved on to the world of Apple, saying Steve Jobs was, "the most design-driven person I've met." He said Jobs called him up back in 2000 and invited him to head Apple's retail store initiative. He jumped at the chance to bring a different philosophy of shopping to computer customers, one that not only moved Apple forward, but also the world of product and store design--"shop different," he described it.
Interestingly, Johnson said that during the first few months of his employment, he used an alias so he wouldn't tip off competitors of Apple's retail initiative (I won't reveal the name in case he needs to use it again!). It wasn't until the press announcement of the first store in Virginia that he became know as Ron Johnson around the company.
Johnson said he outlined Apple's retail strategy to the press, saying the company aimed to put service back into shopping, and change the way people shopped--"high-touch" shopping, he called it. He planned to hire "incredible" people, have dynamic stores, "awesome" real estate and great products. The press response was, "Are you serious?"
"I don't think we convinced one person that this was a good idea at the time," he said. Johnson showed slides of several quotes from the press--all pessimistic. In particular, David Goldstein, president of researcher Channel Marketing, told BusinessWeek, "I give them two years before they're turning out the lights on a very painful and expensive mistake." And yet, Johnson noted, there are now 78 stores generating a profit for the company, and the operation was the fastest retailer ever to reach $1 billion in revenues. "Essentially, in three years we have blanketed the United States with retail stores." He said 100 million people live within 15 miles of an Apple store.
The stores now average 85,000 visitors each day, and specifically last week the stores hosted 487,000 visitors, according to Johnson. Previously, Apple's only direct contact with customers was the annual MacWorld trade shows, which at its peak drew 80,000 attendees to a single show. Now, Johnson said, Apple has contact with that many persons each day.
"Why has it worked?" Johnson asked, especially in the face of all the press and analysts' criticism. "I think it's all about Apple's grounding in design, being applied to a different business from products--to a retail strategy." He said he's taken a lot from his experience with Graves and, "How you take one tea kettle, and change a company like Target." He said it's about how one store with the right concept can not only change a company like Apple, "but can also start to influence retailing all over."
"The world doesn't need another store," he said. If someone wants to just pick up a product and buy it, other companies do that well--"We don't need that," he said. So Apple started with two fundamental objectives, Johnson said, and here is where his remarks turned more philosophical.
The first objective was to design the stores around the customer experience, but in a completely different way. "We didn't think about their experience in the store," Johnson said. "We said, let's design this store around their life experience." Most retailers focus on how do you find the right item, how do you select it and how do you get it out of the store. "We said there's a bigger idea. Let's design it around the customer's life, not the moment when they're in the store."
Secondly, "We said, we want our stores to create an ownership experience for the customer." It's about the lifetime that you own your product that provides value to the store, he explained, and not the transaction itself. "That's what we try to create," he said. Further, at most retail stores, the purchase ends the relationship with the store. At Apple stores, "We like to think that's where it begins," Johnson said.
The first decision when planning the retail stores was the real estate. Apple's "break-through" decision, which skeptical analysts criticized, was to locate their stores in the most expensive, highest-traffic locations. "We wanted people to see our brand," and where people didn't have to drive six miles to visit, but rather walk six feet. Their real estate selections are places where people gather, such as high-end malls, hip streets and so-called "lifestyle" and "destination" centers. He said Apple stores are now on the best streets and in the best malls.
Interestingly, Gateway, he said, "Their best weeks, they advertised that they had 250 visitors a week." In comparison, Apple retail stores average 5,800 visitors a week per store. "So a 5-percent market share player get 25 times the traffic of the established PC seller, which validates the importance of real estate."
The second decision was the store layout, which is simple, intuitive and logical, he said, and intended to, "Guide the intellectual and emotional experience of the customer through the store." He said you have to plan in advance how both new and established customers will experience the brand as they walk through the store.
The design has to be flexible to allow the proper display of current and future products, and fit into the space at all locations and sites.
"But the most important thing we set in our design criteria," Johnson said, "is we wanted to create very distinct experiences for customers, in what they perceive as a public place. More like a great library, which has natural light, and it feels like a gift to the community. In a perfect world, that's what we want our stores to be."
Johnson continued with the philosophy, saying, "And we don't want the store to be about the product, but about a series of experiences that make it more than a store."
Johnson then turned to the store features, explaining how the world of computing has gone digital, because people want to do "digital things," including music, movies and photos. "The world of computing is moving into the digital hub," he said. So, it's not about showing people products, Johnson said, "It's showing complete solutions." He said no one else can do this, and mentioned how Best Buy has "cameras are over here, computers are over here," while he motioned in different directions.
Apple store have product zones, he explained, but more importantly, they have solution zones, where products are paired with software and peripherals for specific purposes. This allows the stores to display and explain how hardware and software combine to create digital solutions for customers.
Each store also has a Genius Bar, Johnson told the group. He noted that the world has gone to telephone support, where your questions and problems are handled by someone after you describe what the problem is. "Wouldn't it be amazing if we had face-to-face support in your neighborhood for high-technology, that was free?" he asked. He likened the concept to "bellying up to a bar," where the bartender is friendly, they know you by name, "you come back, and it's a warm comfortable environment."
The stores have theaters for presentations, a section for kids, and a section that Apple labels as "etc."
He then showed a diagram of the typical Apple store prototype, showing how the store is divided into fourths, each displaying different products or solutions. He explained that 25% at the front of the store is devoted to products, 25% to music and photos, 25% for the Genius Bar and movies, and at the back of the store 25% devoted to accessories and other products.
He particularly noted the interactive front display windows, saying the company has won awards for its window presentations, and that Apple spends more on windows, "than any retailer's ever spent." Other retail stores might have graphics or products, but Apple invests in interactive graphics, he said.
The atmosphere, Johnson said, is inviting, approachable, forward-looking, warm, interactive and intelligent. The interiors are very common, he said. "Apple is never about being tricky. It's about being common." So they use natural materials like stone, wood, glass and stainless steel, using a neutral palette, and "incredible" lighting. Furthermore, they pay "uncompromising attention to detail," he said, and added that, "Every little element in the store is designed to these very details."
As for products, Apple doesn't stock a lot of different products, but the "right" products, Johnson said. In other talks, Johnson has said the company initially picked the six best third-party products in each category to market within Apple's stores.
He noted the graphics inside the stores, saying there are on easily-changeable panels, to keep them fresh and reflecting current products and promotions.
He then showed a series of photos of the SoHo (NYC) store, and pointed out examples of standard store features. He also explained that the glass staircase used inside Apple's flagship stores is designed simply to encourage people to climb the stairs, and thereby increase traffic to the second floor, which is traditionally lower in retail stores than the ground floor.
He pointed out the Genius Bar, saying Apple estimates that 100,000 persons come to the Bars during an average week. At SoHo, he said, 20-30 people line up in front of the store before the 10 a.m. opening time, just so they can be first at the Genius Bar--the conference audience noticeably gasped. The "bar" concept is being considered by other companies, Johnson said, including Whole Foods grocery, which is testing a prototype store in Austin (Tex.) that includes an "advice" bar where shoppers can obtain recipes, purchase advice and other information.
He said SoHo was a key location for Apple because, "When you do well in New York, it changes your brand. It's the most important city, possibly in the world and United States, to build your brand from a design perspective." He noted the SoHo store was inside a former post office built in 1925, and he called it an, "extreme devotion to public space."
"But what's really interesting is not the store design," he said, "but it's what happens within the store every day."
Johnson pointed out the many events staged at Apple stores each day, including Wednesday "Pro Day," 500 school nights per quarter, Switch At 6 presentations for PC-to-Mac switchers, and that Apple will host 22,000 children this summer during Apple Camp sessions. "So we're working real hard to make this a robust and enriching experience," he said, noting that each store has an on-line calendar of events that visitors can check before they visit the store.
Each store has free Internet access, Johnson said. "Busy stores create buzz," he explained. At the flagship stores, Apple has set up Internet cafés, and placed them in the best location within the stores. Why? "We want people who are getting something free to have the best experience," Johnson explained, "not an inferior experience." He said people from out of town, or are on their lunch break can come in and check their mail or video conference with their kids back home.
But what truly sets the stores apart, Johnson said, is that Apple has "amazing people." When he first proposed that store employees not work on commission, "People thought I was crazy at Apple." But he replied, "There's no way I want someone trying to take money out of customers' pockets." Their job is to focus on the customer and get them to switch to a Mac. He said a visitor is going to come back to the store three or four times, "and the last think you want to have to worry about, is Sam going to be there next week, because I started with him or her."
He noted that the Ginza (Tokyo) store received 1,200 applications for about 140 openings, and overall they receive about 20 applications for each job opening. "And as you know, once you get the right people, then all you have to do is treat them well."
"But in a non-commission environment, where your job is elevated to positions of status such as, I'm a Mac Genius. I'm the smartest Mac person in town. People request me on the Internet, to come meet me at the store so I can help them. Or I'm a theater presenter," Johnson said. "My job is to make the store rich with experience for people."
Suddenly, he explained, "It's not the boring, laborious, I've-got-to-move-merchandise and take care of customer problems. I'm suddenly enriching people's lives. And that's how we select, that's how we motivate, that's how we train our people."
Customers do occasionally provide negative feedback, he said, but he receives only about two or three negative emails for every 90 or so positive messages. His policy is to reply to the email messages within 24 hours.
So Apple stores have evolved, he said, from beautiful, well-located, beautifully-designed stores, to an experiential environment that is enriching.
He gave a quick photo tour of the Ginza (Tokyo) store, pointing out the overall design, and the "shuttle" type elevators at the rear of the store, an reiterating that it was designed around the customer experience. He noted the Ginza's 5th-floor training center, and said by the time the store opened in Nov. 2003, its classes had been booked through March 2004.
"So fundamentally, we think what's made our stores successful is the design decision to put the customer at the center, but not the buying experience-- the life experience-- and to really make it all about, in a larger experience, that's even better than what happens when you buy, " Johnson said.
He then asked the key question, "Does good design lead to increased sales-profit?" For Apple, he responded, "The answer is clearly, yes." He displayed a graph of Apple's stock price since the retail stores opened, and it showed the annual price has increased. He forecast the stores will do about $1.2 billion in sales for all of 2004, and make a $30 million direct profit, along with a $200 million in so-called "manufacturing profit" for the year.
He noted that each Apple retail stores averages $3,000 in annual sales per square foot. In comparison, a busy high-end mall like Tyson's Corner (Virg.) averages overall $600 per square foot, while the Providence Place mall might average $400 per square foot in sales, he said. The 2002 national average for malls was $341, and mall developer Westfield Properties reports their malls average $379.
Immediate Sales Figures
During the question and answer session, Johnson explained that Steve Jobs has a daily 9 a.m. to noon executive team meeting, which Johnson attends. The stores' retail sales are tracked and reported every four minutes, and can be retrieved using an internal Web-based interface, he said. Visitor traffic is tracked at 15-minute intervals. Between the two figures, Johnson can almost immediately determine the impact of new product introductions or other announcements. The system helps to integrate the manufacturing, supply and sales channels, he said.
Apple's stockholders meeting happened to be held on the same day as Johnson's keynote talk. Some resellers were picketing the stockholders' meeting to protest pricing practices and competition. In answer to an unrelated question, Johnson acknowledged, "On the channel side, it's been a difficult transition. We have these loyal resellers who have given their lives to marketing Apple products."
He said, "Their belief is when the Apple store comes to town, it's actually going to take away from their business." Apple has been trying to convince them that a successful Apple retail store creates more business for everyone. In fact, Johnson said, only two resellers have closed since Apple opened their own retail stores, and Apple products are sold in twice as many outlets now as when the Apple stores first opened. "We studied the markets where we had stores, and how the channel does compared before," he said. "The channels do better with stores than without."
"Absolutely," Johnson said, when asked if Apple deliberately transferred the U.S.-style retail stores, unaltered, to Japan. He explained that a person from Japan buying a Macintosh wants to "connect with Apple. They want to connect to Cupertino. They want the experience to be an Apple experience, not an Apple-perceived Japanese experience." He said that if you examine the branding of other non-Japanese stores along the Ginza, you'll find they also don't attempt to localize their products and marketing. Instead, they rely on their native language and brand. "We intentionally made the store experience like you would an Apple store in the United States."
In response to another question, Johnson confirmed the Regent Street (London) store will be two levels, and revealed it will be 75-feet wide. He said it would have other "neat elements" that he declined to reveal, and it will open in November. He acknowledged the building is considered historic, and added, "We're going to respect the façade." He said Apple will build the structure back to what it was "many, many years ago," and retain the original design of that part of the building that Apple occupies. He explained that a large part of Regent Street has been controlled by the Crown since the 11th century, and drew a laugh when he said the store across the street has a 200-year lease on the space.
Another audience member asked when Apple would be coming to Providence, and Johnson said the company had been trying to obtain a space in the nearby Providence Place mall for about a year. He said the existing tenants had long-term leases, and space was difficult to find. He noted that when you sign a five to 10-year lease, "You want to make sure it's the exact, right place." He said the company is looking at 100 other potential locations, and tries to be very patient to obtain the proper real estate. But he promised that eventually an Apple retail store would be located at Providence Place, "as soon as we can."
Another questioner jokingly asked if Apple had considered serving up beverages at its Genius Bars. In fact, Johnson said, when the first stores opened, Apple offered free 4-ounce bottles of Evian water at its Genius Bars. However, so many people came to the Genius Bars, and so many asked for the water, that it became "really expensive." The company stopped the free water program after six months--and has since dispensed only advice. He said Apple also considered serving hot beverages, but determined it would require obtaining permits in most cities and more employee training, a process which was too complex. He reminded the audience that Apple lets visitors bring in their own beverages.
Johnson answered another question about the lessons Apple has learned, saying, "We want our stores to innovate the customer experience through constant improvement." He said they've learned how they need to manage the crowds at the Genius Bar, and that visitors to the theaters want to hear someone local, someone who can share their own experience with Apple's products.
He said they found that their original prototype store was too big for some markets, so they designed a prototype store that is 50% smaller, and have five locations that use that prototype. "We've learned a lot about the type of real estate that works, because we've opened enough locations. So it's a constant flow of learning. But the big decisions we got right. The real estate decision we got right," he said. "Having an uncluttered store, focused on the customer experience, was a great decision."
When asked about Apple's market share, Johnson said Apple's U.S. business, "is on fire." He explained that as more and more computers are sold, the same market share percentage represents a larger number of computers and users. So even with a flat market share percentage, Apple continues to sell more computers and to gain new users.
A woman in the audience asked Johnson what keeps him awake at night, and he told her, "I've never been a worrier." Instead, he spends any waking periods sorting through new ideas.
In response to another question, Johnson recalled the early design work on the retail stores, saying the company worked several months to design and construct a full-scale mock-up of the store prototype in a warehouse near Apple's headquarters. When the team of retail and design experts had finished their work in Oct. 2000, Johnson had a revelation. He approached Jobs to say, "Steve, I think it's wrong." The design didn't incorporate the digital hub that was then becoming so important to the company's strategy, and Johnson told him, "I think we're making a mistake. This is about digital future, not just about products." Jobs replied, "Do you know what you're saying? Do you know we have to start over?"
Jobs stormed off to his office, but returned within an hour in a better mood, having realized that virtually every great project at Apple, "had been shelved and started over." For example, Johnson said the current iMac design was considered finalized--and then the design was tossed out and the process was restarted, to eventually come up with the current design.
"But I think the one thing that sets apart our stores and Apple, is fundamentally two types of people in the world, in my view. There are believers and there are skeptics," Johnson said. "Apple is filled with believers. And believers tend to think of what can be, and they just go do it, and they don't spend time asking why not. They go and make it happen."
photos by Frank Mullin
April 27, 2004